P&C insurers face first-ever loss

Poor investment returns hurt property-casualty firms

By

VickyLankarge

WEST HARTFORD, Conn. (insure.com) - The U.S. property and casualty industry appears headed for its first-ever annual loss after posting a $3.1 billion after-tax net loss through the first three quarters of this year.

The nine-month net loss resulted largely from sharply higher claims in the wake of the Sept. 11 terrorist attacks, the Insurance Information Institute said. The industry's net loss on underwriting rocketed almost 80 percent to $37.5 billion, versus $20.8 billion through the first nine months of 2000.

Other factors for the losses include a 5.7 percent decline in net investment income to $27.5 billion through the first three quarters, down from $29.2 billion a year earlier; and a 45.7 percent drop in realized capital gains to $6.9 billion, down from $12.8 billion.

The losses send two messages to property/casualty insurers, says Diana Lee, a vice president with the National Association of Independent Insurers (NAII).

"First, insurers need to continue focusing on managing their exposure to catastrophes, man-made or otherwise," Lee says. "Second, insurers must focus on fundamentals such as underwriting and pricing, as they cannot count on investment gains to offset poor underwriting results."

Rate increases

Insurance companies that insure personal lines (autos and homes) have been little affected by the events of Sept. 11, NAII spokesman Joe Annotti said. "Most consumers' exposure to terrorism hasn't tremendously increased. I suppose if you have an apartment next to the Sears Tower, your policy premiums have increased, but that's in relatively few situations."

In 2002, insurance premiums will rise about 6 percent nationally for private homes and cars, the III estimates. Premiums for commercial businesses, after decreasing for the past few years, will increase by an estimated 30 percent.

In some markets, such as aviation insurance, rates may increase as much as 400 percent. The III said about half the increase in commercial insurance rates reflects market forces after Sept. 11, including "the changing nature of risk and an increased demand for insurance at a time when available capital, particularly reinsurance, has shrunk drastically."

In consumer property/casualty insurance such as auto and home coverage, rising car repair costs, medical costs, and jury awards account for the need for "modest" rate increases across the country, III Chief Economist Robert Hartwig says.

"Individual homes and cars are not terrorist targets," Hartwig says. "Increases are really unrelated to Sept. 11. Rates were flat for most of the 1990s. Now they are generally going up, but should mean a relatively modest $30 for the average homeowner and $50 per vehicle."

Sept. 11 fallout

Industry experts say the fallout from Sept. 11 is far from over. As of Sept. 30, U.S. insurers posted only about $10 billion in net losses from the attack, according to John J. Kollar, a vice president with Insurance Services Office.

Those same experts predict the ultimate cost in total insured losses will be $30 billion to $70 billion. "With so many losses from Sept. 11 yet to hit insurers' results, and the industry posting a net loss through nine months, we seem headed toward the first-ever net loss for a whole year," Kollar says.

Reflecting the net loss after taxes and losses on investments, the industry's surplus fell 11 percent to $281 billion on Sept. 30 from $317.4 billion on Dec. 31.

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